Will the upward trend in stock prices continue, or... This week's stock price suddenly turned down on the afternoon of the 23rd, and the Nikkei average fell on this day and the next day on the 24th, but has since risen again. The current market is said to be supported by shareholder return measures launched one after another by companies, such as share buybacks. How do investors view Japan future potential of companies? And what is required of companies? (Economic Affairs Department Reporter: Kei Nakazawa)

Share buybacks reach record size

Corporate share buybacks are at an unprecedented level.

According to the Tokai Tokyo Research Center, from May 5 to 1, companies listed on the Tokyo Stock Exchange announced share buybacks totaling 25.3 trillion yen.

The total amount of share buybacks announced by companies in a single month has already exceeded the 2400.1 trillion yen in May last year, making it the largest ever.

A share buyback is when a company buys back its shares from the market, and many investors see this as one of the shareholder return measures because deleting the purchased shares will reduce the total number of shares issued by the company and increase the value per share.

According to a one-year survey by the Daiwa Institute of Research on the stock price trends of companies that announced share buybacks in fiscal 5, fiscal 3, and fiscal 1200, when the market was relatively stable in the past five years, the stock price increase rate of companies that repurchased their own shares was 1.1 percentage points higher than that of companies that did not buy back shares.

In the Tokyo stock market in May, there were a number of cases where stock prices rose significantly immediately after companies announced share buybacks.

We examined the stock price trends of 5 companies that announced share buybacks from May 1 to 25.

Comparing the closing price of the stock before the announcement with the high price during the next trading day, the average increase is 209.3%.

Of the 6 companies, 209 increased their prices at the closing price on the next business day.

On the other hand, 143 companies saw price drops.

There are some companies that have repurchased their own shares, but the price did not continue to rise, and eventually went down.

TSE Improvement Requests Expect Reform of Low PBR Companies

So why are companies actively buying back their own shares?

The background is that the Tokyo Stock Exchange has encouraged companies with low market evaluations to make improvements.

Regarding companies listed on the TSE, there are many companies whose index called PBR = price-to-book ratio, which indicates several times the stock price relative to net assets per share, is less than 1x, and the low evaluation in the market is an issue.

In January, TSE announced its policy of asking companies with low market ratings to make improvements, and in late March, TSE notified listed companies to respond in line with this policy.

In response to this, a number of companies have set a goal of exceeding 1 times PBR and are implementing share buybacks as part of shareholder returns.

For many years, the PBR of major printing companies Japan Printing had been below 1x, but in February, the company set "early realization of a PBR of 3x or more" as its basic management policy, which has raised expectations for reforms among investors and the stock price has been on an upward trend.

In March, the company announced a large-scale share buyback.

At the same time, the company announced its intention to focus on manufacturing exterior materials for lithium-ion batteries for EVs and to strengthen its medical-related business by utilizing its image processing know-how.

Then, the stock price rose further and the PBR temporarily exceeded 1 times.

Recently, it has been moving around 0.9 times.

"European" investors lead investments in Japan stocks

Overseas investors are paying attention to these changes in the behavior of Japan firms.

According to a survey by the Tokyo Stock Exchange, overseas investors overbought domestic stocks for eight consecutive weeks from late March to the third week of May (3th to 5th).

The amount is more than 3.15 trillion yen.

So which regional investors are buying Japan shares?

According to the trading status of Japan shares surveyed by TSE, the total amount of overpurchases by overseas investors in April was more than 19.8 trillion yen.

Of this, "Europe" accounted for more than 3.6300 trillion yen.

This is followed by Asia, which has overbought more than 4 billion yen.

On the other hand, investors in North America oversold more than 2 billion yen.

Why did "European" investors turn to Japan stocks?

Hiromi Ishihara, General Manager of the Equity Management Department of Amundi Japan, a Japan corporation of one of Europe's largest asset management companies with assets under management exceeding 1500 trillion yen, said the following.

"As European investors become increasingly concerned about the future of the Western economy, they are allocating their funds to Japan stocks in a "law of elimination," which seems to include 'petrodollars.' Some Japan companies with low PBRs are being asked by activists to strengthen shareholder returns, and some overseas investors are taking advantage of this to buy Japan shares. However, we cannot give a positive assessment to a company that simply announces share buybacks. Capital policies such as share buybacks should be launched as part of a medium- to long-term corporate growth strategy, and the market will become more severe."

Many Japan companies are trying to break out of the low PBR situation by raising stock prices by conducting share buybacks in a competitive manner, but will the funds allocated for capital investment and R&D be curbed while spending funds on share buybacks?

The question will also be how to utilize funds for growth.

Upcoming

This week, we will continue to pay attention to the future of negotiations between the Biden administration and the opposition Republican Party over the US debt ceiling issue and the reaction of the market.

In addition, the employment statistics of the United States will be released on the 2nd.

While market attention is focused on whether to pause rate hikes at the Fed's June monetary policy meeting, the focus will be on whether the employment situation remains strong that is likely to influence the Fed's decision.